Making Hay Monday
High-level macro-market insights, actionable economic forecasts, and plenty of friendly candor to give you a fighting chance in the day’s financial fray.
Happy New Year, Readers and Subscribers!
We’ll be the first to admit that we posted last week’s Haymaker Special Edition – in which we expounded on American politics and made an appeal for No Labels – with an understanding that we might alienate a number of you in speaking filter-free on the state of the upcoming POTUS race. Though our criticisms of the respective frontrunners for both major parties were grounded in fact (see a couple of general examples linked at the end of this piece), we realize that truth can hurt when one is heavily invested in a given candidate’s election prospects.
To our happy surprise, the responses have been mostly positive and the criticisms (such as they were) tended towards the fair-minded and nuanced. We welcome that sort of pushback and view this platform as a dialogue medium, rather than a high horse. Given the positivity that so many of our regular and new readers expressed regarding the No Labels project and our reason for throwing the weight of this publication behind it, we are now considering running a monthly political piece, at least through November and possibly leading up to the 2025 Inauguration.
In my view, the importance of a powerful bipartisan movement such as No Labels goes beyond the presidential election. Healing our broken political system by seeking unity, or at least respectful dialogue, on America’s key threats and problems transcends even the appalling prospect of another Biden/Trump face-off (and what geriatric faces, they are!).
Frankly, if this election turns out as chaotic and divisive as I fear, it will have massive financial and economic implications. Consequently, it’s anything but irrelevant to investors. Yet, few mainstream Wall Street strategists are discussing the risks, and market ebullience clearly indicates widespread complacency. If you didn’t know this – and I didn’t until this weekend – the “S” word, as in Secession, may soon come up for a vote in Texas. More to follow on this topic, but don’t be surprised if you see Election-focused Haymakers on your digital doorstep in the months ahead.
A couple of changes we can announce with certainty are that our Trading Alert editions, which we have been running on Fridays, will now be a part of our Monday editions. Also, we will move our Chartbook to the Friday slot and, as previously indicated, we will run that periodically versus every week. (The Champions, etc, will for sure be part of MHM). Founding Members can still expect to see mid-week Premium Resources posts (occasionally, with bonus Trading Alerts). There’s a bit of shifting in the works, but the twice-weekly posts (thrice for Founding Members) that make this newsletter such a value-add for our readers will continue.
Thank you and let’s get this year going together!
David “The Haymaker” Hay
“Markets are currently priced for perfection which in market terms means six interest rate cuts by the Fed, strong corporate earnings, geopolitical stability, and a smooth 2024 Presidential election. The odds of that scenario materializing are roughly zero yet trillions of dollars were invested in recent months based on belief it will happen.” -Michael Lewitt, Author of The Credit Strategist
It Happens Every Time
Don’t get me wrong. There’s definitely a sense of satisfaction, bordering on elation, when, as a portfolio manager, an asset class you have been heavily overweight kicks into overdrive. Yet, there is also a palpable melancholy that follows close behind.
In this case, I am referring to the outstanding performance by BBB- and BB-rated corporate bonds since last spring, and particularly from the end of October. As I’ve previously documented, those returns have been competitive with a rip-roaring stock market. In some cases, they’ve been even better.
But now that they’ve done their usual thing at the tail-end of a Fed tightening cycle, when markets have been aggressively pricing in at least six rate cuts, the best returns are in the rearview mirror. The fact that high-yield credit spreads have also come down by 2%, or 200 basis points, since the peak in the summer of 2022, is almost impossible to replicate. As a result, future capital appreciation isn’t out of the question, but it is nearly certain to be much less robust.
Hence, my bittersweet attitude toward the great corporate bond rally of 2023 that lifted off in October (by the way, very few seem to be aware of this occurrence). This has been my reaction to all of the past bond bear markets I’ve bought into, especially 2008/2009. That was the worst sell-off corporate debt has endured since the early 1930s during the teeth of the Great Depression. The rally that began in the late winter of 2009 was one for the ages and was a huge boon for Evergreen clients back then. That’s when double-digit yields were common but, sadly, most investors were too terrified to pounce on them.
Now, when I check out the table of highlighted corporate bonds every morning in The Wall Street Journal, where I’ve found a number of excellent bond buys over the last 18 months, the yields seem pedestrian. For sure, it’s still possible to locate solid credit situations with 5% type yields. That remains a nice rate to lock in, but the days of 6% to 7% yields are gone, at least for now… well, actually, almost. Fortunately, there are still a few lingering bargains that merit capital commitment, with some caveats.
It’s no secret that Brazil has been one of my favorite bond markets. However, as I’ve repeatedly conceded, it’s almost impossible for most U.S. investors to buy Brazilian government bonds denominated in its currency. (The indirect and easily available option are the closed-end funds I’ve mentioned many times, but those are far from pure plays.) It’s unfortunate because Brazil’s “govies” continue to yield around 10%. Further, I believe currency appreciation versus the exceedingly overvalued U.S. dollar (USD) is likely in the months and years to come.
Though it’s not optimal, because you lose the potential currency upside, it is much more feasible to buy Brazilian bonds denominated in the USD. What might be even more appealing is to check out a corporate bond from one of Brazil’s finest companies. You may recall that I alluded to this earlier this month. It’s now time for this week’s Trading Alert unveiling, at least for our cherished paying subscribers. …
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